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AS BUSINESS GETS A BIT BETTER, COMPANIES BEGIN TO BORROW AGAIN
THE DEMAND FOR BUSINESS LOANS IS GROWING AGAIN AFTER THREE YEARS OF DECLINE

Don Matre is looking forward to having some new semi-trailers and fork-lifts for his pallet-making business.

The president and chief executive of Pallett Services in Tonawanda is borrowing $500,000 from Evans National Bank to buy new equipment and expand.

Matre has been hesitant for quite a while about taking out a new loan because of the economy. But more than half of his customers are reporting higher sales and they need his pallets.

"The last couple of years were a little soft for us. We were just trying to hold our own, not trying to increase our debt," said the Kenmore native, who has been in the pallet business under different names for 20 years. "Business has picked up quite a bit this year, so we've gone back and done some of the things that needed to be done."

For the first time in several years, banks are reporting an increase in loan demand from business customers like Matre. It's not huge, and it's starting from low levels, so they're remaining cautious. But it's also the first sign they've seen that area businesses are again secure enough to expand and borrow.

"Small businesses are out there looking to grow and are borrowing because of that," said Sterling Kozlowski, head of small business lending for the Buffalo market at HSBC Bank USA. "They're definitely more confident about the economy."

And in turn, that's yet another sign that economists, bankers, and others have been waiting for to show that the nation's economic recovery has finally taken hold.

"We've been looking for the turnaround for some time," said Richard A. Brown, chief economist at the Federal Deposit Insurance Corp., a bank regulatory agency that insures deposits. "It's been a long time coming."

Commercial lending is a key figure for measuring the economy because it reflects businesses' confidence, their spending on investments for the future, and willingness to increase their debt load to try to drive sales higher. But the demand for business loans has been slack amid the worst three years for business investment since the mid-1970s.

Demand peaked in 2001

Total commercial and industrial loans at U.S. banks peaked in January 2001 at nearly $1.1 trillion before falling 20 percent to the current low levels of less than $880 billion, according to Federal Reserve.

That doesn't mean businesses have been doing nothing. Many had cash hoards that they used to pay for any new equipment or other investments that they have needed in the interim. And others turned to the bond markets because of low rates.

That's been changing in the last few months, especially since March, as factory orders soared. Banks are seeing more requests for both business loans and lines of credit, to buy equipment, build inventory and construct new facilities. Loan volume is up, and there's a growing pipeline of applications still working through the approval process for the next quarter, both nationally and in Western New York.

Freezing more fish

Take Schneider's Fish & Seafood. The family-owned seafood distributor in Cheektowaga is borrowing $800,000 from HSBC Bank USA and the Erie County Industrial Development Agency to build a new 10,000 square-foot freezer and buy related equipment. That would give it space to hold 850 pallets of seafood, equal to about 40 tractor-trailer loads.

Together with its existing 3,500 square-foot freezer, the company will be able to store 2 million pounds of fish.

Schneider's, which now sells more than 5 million pounds of fish per year, hadn't done any significant borrowing or expansion in about eight years, since it moved to Cheektowaga from Elmwood Avenue in Buffalo. But co-owners Steve and Brian Perelstein, who bought the company from their father, wanted the additional storage space as they boost sales.

"We're doing everything we can to help grow the business," Steve Perelstein said.

Among the 108 banks traded on major stock exchanges that have already reported earnings, average commercial loans grew 25 percent from the first quarter to the second quarter, when annualized on a full-year basis, according to SNL Financial, a research firm in Charlottesville, Va.

Second-quarter spike

For large corporate loans that banks share to spread out risk, total volume in the second quarter spiked up to nearly $450 billion, more than double the first quarter's level, according to Loan Pricing Corp., a New York research firm. That's the highest level in eight years.

The trend is also strong among small businesses. The Buffalo District office of the U.S. Small Business Administration handled 336 loans through its basic loan guarantee program in the fiscal year that ended last September. But in just the first nine months of fiscal 2004, the office has processed 347 loans, and is on track to hit about 500.

And the Federal Reserve's senior loan officer survey of 60 large U.S. banks found that 28.6 percent of lenders felt there was more demand for large and middle-market business loans in the second quarter, the highest since 1998. In the first quarter, that was 10.7 percent, after 15 straight quarters of more lenders perceiving falling demand.

"Everybody was holding back and waiting to see what was going to happen. Now they're encouraged that the economy is moving in the right direction," said Sharon Lochocki, senior vice president for business banking for Western New York at Cleveland-based KeyCorp.

A consumer counterweight

Banks have been eagerly awaiting the pickup to boost their bottom line, especially now that rising interest rates have dampened consumer lending.

"The banks themselves get a nice boost when some of the customers start receiving orders and need to buy new machinery," said William R. Glass, senior vice president of lending at Evans National in Hamburg.

At M&T Bank, business loan growth drove a $1 billion increase in total loans in the second quarter, and the bank has another $1 billion in the pipeline for the next three months. About 43 percent of outstanding lines of credit were being used, up from the low point of just 41 percent at the end of January.

For small business loans, the bank processed 1,678 loan applications in the first half of the year, up 10 percent from 2003.

In the Buffalo area, middle-market loans -- which officials said hit bottom in January and February -- are up 6 percent since the end of January after steady declines since 2001. Outstanding loans are up about 2 percent since the end of February to $1.3 billion at the end of June.

"We're very much looking forward to a much anticipated turn, and hopefully what we're seeing now is an indication of a long-term trend," said Jeffrey Wellington, president of M&T's Buffalo division for middle-market lending.

At Bank of America Corp., middle-market business loans coming through the pipeline in upstate New York for the second quarter were up more than 122 percent over the first quarter. That, in turn, was up 133 percent over the fourth quarter of 2003.

Confidence on the rise

"The business owner is a little more confident about the prospects for the future, and is a little more willing to commit that capital to expand the business," said Kevin Murphy, Bank of America's market executive for upstate New York for middle-market lending. "I would certainly not call it strong. But it certainly has improved."

Small business loan closings in the second quarter were up 213 percent over the first, especially for equipment financing, said Mary Bintz, the company's upstate market manager for small business banking.

One of those customers is Color-Tech Photo Labs. The Amherst-based photo processor, which has three retail stores and a professional division, is buying new printing equipment to allow it to handle more digital camera work and processing as business has picked up. So it took out a $170,000 loan from Bank of America.

Two months ago, it took out another $30,000 loan to buy three Kodak digital kiosks where consumers can insert a digital camera card to print photos.

"We haven't been sitting on the sidelines, but it's an opportunity for us to buy some technology that would be really beneficial to us," said president Paul Crawford, whose company prints between 5 million and 8 million photos a year. "The climate has started to change for us. We're seeing more customers."

Not going gangbusters

KeyBank reported an 8 percent annualized increase across the company in average commercial loans for the quarter. Locally, the small business group saw loans rise as much as 12 percent from the first quarter to the second, while total commercial loans rose 4 percent to $912 million for Western New York.

At J.P. Morgan Chase & Co., the nation's second-largest bank, business loan volume for upstate New York rose 2 percent just from June to July, and is up 4 percent from March. Most of the gain is from existing customers coming back to the till, not from new customers. Three big commercial real estate deals are heading through the pipeline for the third quarter.

"Loan demand took a nice tick up in the second quarter, and the pipeline is going to be very very good coming forward," said E. Malcolm Wolcott Jr., senior vice president and senior executive for Chase's middle-market lending in upstate New York.

And First Niagara Financial Group in Lockport reported that commercial loans grew 23 percent annualized in the second quarter, with real estate loans rising 27 percent, or $145.6 million. Use of commercial lines of credit is up to 38 percent from 35 percent in March and a low of 30 percent in December. And there's another $171 million in the pipeline for the next quarter.

"It's clearly a positive sign that there are new construction projects being built throughout Western, Central and Eastern New York," said chief lending officer G. Gary Berner. "It's not going gangbusters, but there seem to be solid indicators that businesses are gearing up. It just appears that there's light at the end of the tunnel."

e-mail: jepstein@buffnews.com

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